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This year’s Federal Budget has been released one month earlier than usual, in April instead of May. We expect a Federal election will be called in the next few days and will be held on either Saturday 11 or Saturday 18 May 2019.

Timing

A handful of budget measures will start immediately, from 2 April 2019, most notably the extended eligibility for the instant tax write-off for asset purchases by small and medium-sized businesses. The increase to the low to middle income tax offset payments applies in this financial year (2018-19) but will be paid out in people’s tax refunds after 1 July. The one-off ‘energy assistance payment’ to pensioners and other welfare recipients will be paid in the current financial year, before 30 June. 

The remainder of these budget proposals will need to be passed by the Australian Parliament after the forthcoming election, in order to be enacted and implemented on the dates proposed. The proposed changes to tax rates and thresholds for businesses and individuals have been brought forward from last year’s timetable, but they are still spread over several years.

Tax changes for business: company tax rates and thresholds

This budget brings forward the timetable for the Government’s existing company tax reduction plan, for small and medium-sized businesses with a turnover of up to $50mn per year. The Government estimates this will benefit 3.4 million businesses.

These businesses will now have their tax rate reduced to 25% in 2021-22, five years earlier than originally planned. The following company tax rates in each year:

  • 27.5% 2019-20
  • 26% 2020-21
  • 25% 2021-22

Company tax rates for larger businesses (over $50mn) will not change from their current 30% level under this revised plan.

The tax discount rates for unincorporated (micro) businesses are also being brought forward. The discount tax rate for these businesses will rise from 8% in 2019-20 to 16% in 2021-22. The value of these discounts remains capped at $1,000 per year per business.

On the tax raising side, the government plans to invest over $1bn in the ATO's tax avoidance taskforce operations. It expects to raise an additional $4.6bn from this operation over the forward estimates.

Tax changes for business: extension of immediate tax deductibility for assets

The popular tax deduction for small business asset purchases is being extended yet again this year. The Budget proposes to:

  1. Increase the amount that can be instantly claimed from $25,000 to $30,000 per asset. Multiple asset claims per business are allowed;
  2. Raise the eligibility threshold from $10mn to $50mn in annual business turnover;
  3. Apply these new asset and turnover limits to assets purchased after 7.30pm on 2 April 2019 and until 30 June 2020.

The Budget estimates this extension will be worth an estimated $400mn to eligible businesses over the next four years.

The Government says that 350,000 businesses utilised this tax break in 2017-18. The increase to the turnover threshold means an additional 22,000 businesses will be eligible to utilise this measure between now until June 2020.

On the tax raising side, the Government plans to invest over $1bn in the ATO's tax avoidance taskforce operations. It expects to raise an additional $4.6bn from this operation over the forward estimates.

Tax changes for individual taxpayers: personal income tax rates and thresholds

In addition to the tax cuts that were already scheduled to commence from 1 July 2019 (under last year's budget measures), this Budget extends and increases the low and middle income tax offsets (LMITO) until tax cuts commence in 2022.

In total, these changes will reduce the tax revenue paid by individuals by $19.5bn over the forward estimates period, with the biggest reductions commencing in 2022-23 when the marginal tax rates and thresholds are amended.

This proposed program of tax changes will include:

  • From 2018-19 until 2021-22, the low and middle income tax offset (LMITO) will increase to a maximum of $1,080 per person per year (previously $530). It will be scaled to provide varying levels of tax relief of to taxpayers up to a taxable income of $126,000. The offset will be applied after tax returns are lodged from 1 July 2019 and paid in the form of a tax refund.
  • From 1 July 2022 the tax rates and thresholds will progressively change over several years, with the final tax rates locked in from 1 July 2024 (table 2)

These tax offsets and rate cuts aim to boost the post-tax income of low to medium income households in the short term and to strip out the impact of 'bracket creep' over the longer term. The final tax rates and thresholds that are proposed will result in a flatter, simplified tax structure, with fewer (but much larger) tax brackets.

Table 1: Proposed individual tax rates and thresholds, 2017-18 to 2024-25

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In addition and separate to these tax changes, the Medicare low income levy threshold will rise in line with CPI to $22,398 for singles, $37,794 for families and $35,418 for single pensioners. This will reduce revenue (and save low income earners) an additional $250mn over the next four years. This is largely an automatic annual process, since this levy threshold is indexed against inflation (headline CPI).

Measures to support employment, skills, education and training

The key announcements in support of workplace skills appear to be firmly in line with Ai Group's Pre-Budget and Joyce Review submissions. Separately, there is an additional $525mn over the next five years to boost existing VET skills programs. This funding will include:

  • $132.4mn over four years for a new National Skills Commission to drive overdue long-term reform of the VET system, including piloting new Skills Organisations with a focus on future jobs growth and the establishment of a National Careers Institute;
  • $67.5mn over five years for 10 new school-based vocational training hubs in regions with high youth unemployment;
  • $62.4mn over four years to expand language, literacy and numeracy programs, an importantly digital skills for at-risk workers and programs for remote Indigenous communities, an area for which Ai Group has consistently advocated;
  • $200mn over four years for a new Additional Skills Shortage Payment to employers to support an additional 80,000 new apprentices over five years, in conjunction with refinement and improvement to the existing employer incentive scheme;
  • An additional $34.2mn in 2019-20 to support the six signatory states and territories in the Skilling Australians Fund (which pays for apprenticeship initiatives from the proceeds of employee visa application fees);
  • $20mn over four years for the Department's Jobs Education and Infrastructure Data Project enabling expansion of the Unique Student Identifier (USI) to all higher education students supported by a centralised records repository;
  • $8.5mn over four years for 400 training scholarships, as well as supporting the National Rugby League's VET Apprenticeship Awareness Program.

The Report of the Expert Review of Australia's Vocational Education and Training System (Joyce Review) Strengthening Skills was released alongside the Budget and Ai Group will analyse and report on its recommendations over coming days.

Measures affecting industry, technology, science and innovation

This year’s budget includes important changes to existing programs for industry, although no significant new programs were announced.

R&D Tax incentive (RDTI)

While not raised in the main Budget Papers, portfolio documents indicate an additional $1.35bn will be shaved from the RDTI across the forward estimates. This appears to be additional to the $2.4bn cut last year as a result of structural changes. It is unclear where the reductions in RDTI are to come from particularly since planned amendments to the scheme have not passed Parliament having been put on hold after a Senate Committee cast doubt on whether they should proceed. While we are seeking clarity on the changed RDTI estimates, speculation is continuing that businesses are turning away from the scheme in the face of ongoing upheaval and uncertainty.

Entrepreneurs Program and Growth Centres

Ai Group will also seek further information on the estimated ‘efficiencies’ of $48.9mn over the current year and the following four years that have been budgeted against the Entrepreneurs’ Program and the Industry Growth Centres Initiative. It is understood the ‘efficiencies’ will come from uncommitted funds.

Black Economy Taskforce Measures

As previously announced in response to the Black Economy Taskforce, the Government will strengthen the Australian Business Number System. This is expected to raise an additional $22.2mn in revenue over the next four years.

The tax integrity measures recommended by the Black Economy Taskforce are also progressing, with a focus this year on reducing corporate and multinational tax avoidance.

Measures to support international trade and investment

Funding for the export market development grants (EMDG) program will increase by $20mn per year for the next three years. This will provide access to this popular program for more businesses. Eligibility criteria for these grants are unchanged.

The budget confirms and commences some of the arrangements associated with Australia's Free Trade Agreements (FTAs) with Hong Kong and Indonesia.

The FTA with Hong Kong will ensure that all Australian imports and exports from Hong Kong have zero tariffs. This will cost the Federal Budget $40mn over the next four years, which means a saving to businesses and consumers of $10mn per year in tariffs they previously paid on imports from Hong Kong.

The FTA with Indonesia will include an increase in the number of working holiday ('backpacker') visas available for Indonesian nationals, from 2,500 to 5,000 places per year over the next six years. The Government will gain an estimated $40mn in revenue as a result of the fees associated with this visa program expansion.

All visa fees except those for tourist visitors (visa category 600) will rise by 5.4% from 1 July 2019. This will raise an additional $275mn from visa applicants over the next four years.

Measures to support defence industries

No new spending programs were announced for defence or the defence industries. The Budget confirms that the key focus of defence in 2019 is cyber-security for Government agencies and departments, and particularly for the 2019 Federal Election. Funding is not disclosed in the budget, but new capabilities will be established to implement cyber-security measures across Government.

The Government has reiterated its commitment to increasing defence spending to 2% of GDP by 2020-21. In total, the Government plans to spend $200bn on defence services, programs and materiel over the next decade.

Measures to address energy markets and climate change

The environment and energy portfolio will receive an additional $26mn this year (2018-19) and next year (2019-20), and $75.5mn over the next seven years (to 2024-25) to invest in ‘reliable energy supplies’ for the National Energy Market. This funding will include:

  • $50mn towards feasibility studies for microgrids;
  • $10mn towards business cases for affordable energy in North and Central Qld;
  • $8.4mn towards feasibility studies for gas supplies in the Northern Territory.

$2 billion in total revenue is now available for the 'Climate Solutions Fund', including new and existing funding (previously the Emissions Reduction Fund).

New and existing funding is confirmed for specific energy-related infrastructure projects including:

  • $1.4 billion in funding for Snowy Hydro 2.0.
  • $56 million for Battery of the Nation and Marinus Link projects in Tasmania.

As already announced, four million Australians will receive a one-off ‘Energy Assistance Payment’, worth $75 for singles and $125 for couples. This will be delivered to age pensioners, people on the Disability Support Pension, veterans, carers and single parents before July 2019. This will cost a total of $284mn.

Changes to permanent immigration program: annual quota reduced to 160,000 people, increased incentives to study and settle in regional locations

The total annual quota for permanent migration is being cut to 160,000 people per year from 2019-20, down from 190,000 in 2018-19 and each of the previous five years. This will amount to 120,000 fewer places in the permanent migration program over the next four years. The Budget indicates that the government expects no fiscal implications as a result of this change (that is, the change will be revenue neutral).

In 2019-20, 108,682 places will be reserved for the skilled migration scheme, 47,732 for family migration and 3,586 for child and special eligibility categories. Visas for humanitarian purposes (refugees) are additional to this total quota of 160,000. Within this reduced total cap, two new regional provisional visas are confirmed which will encourage skilled migrants to settle in regional locations for at least three years.

An additional $64.2mn is allocated to 'social cohesion' programs to assist migration settlement services, over the next four years. But at the same time, $80mn is being cut from jobseeker assistance for recently arrived refugees, who will now wait for 12 months instead of 6 months for ‘jobactive’ assistance services).

No caps or quotas apply to student visas. Instead, the government will offer $93.7mn in new 'destination Australia program' scholarships over the next four years to Australian and international students who undertake their studies in regional Australia.

The budget confirms that from Nov 2021, international students who study in regional areas can apply for an additional year of post-study work visa if they are still residing in a regional area (Temporary Graduate 485 visas).

New infrastructure announcements: heavy focus on roads and rail

This year the Budget boosts total transport infrastructure spending to $100bn over the forward estimates (four years), or an average of $250mn in total spending per year.

National projects with confirmed funding include:

  • A new Road Safety Package $2.2 billion;
  • Urban Congestion Fund increased from $1bn to $4bn and including a new Commuter Car Park Fund of $500mn to upgrade car parks at suburban railway stations;
  • Roads of Strategic Importance funding increased from $3.5bn to $4.5bn;
  • Major Project Business Case Fund $250mn;
  • $2bn to help deliver fast rail from Geelong to Melbourne;and
  • $294mn to upgrade security at airports to help prevent terrorist attacks.

The major infrastructure projects in each state are shown in chart 1 below.

Chart 1: New and existing funding commitments for major projects in each state

Chart2

Budget balance and debt: mining-related tax revenues doing the heavy lifting

This Budget delivers a 'net operating balance' surplus of $8.5bn in the current (2018-19) year and an ‘underlying cash balance’ surplus of $7.1bn in the coming (2019-20) year. If fully realised, these will be the first budget surpluses for the Australian Government since the GFC disruptions commenced over one decade ago (Table 2 and Chart 2).

Much of this improvement is due to revenue gains from mining-related company tax revenue. This reliance on resources-related tax revenue leaves the budget vulnerable to volatility in global resources prices. Indeed, Treasury flags resources prices – and especially the price of iron ore – as a key risk to the budget forecasts.

Sensitivity analysis conducted by Treasury for this budget indicates the iron ore price is especially important. This year's budget has been relatively conservative in assuming an iron ore price of $55 per tonne over the next four years, which is well below the current price. Treasury has calculated that a $10 fall (or rise) in the iron ore price would reduce (or increase) nominal GDP by $6.3bn in 2019-20 and $13.6bn in 2020-21, and reduce (or increase) nominal tax receipts by $1.1bn in 2019-20 and $3.7bn in 2020-21. These large effects mean that the price of iron ore has a direct impact on the economy and on the Government’s ability to achieve and maintain a budget surplus.

Net debt is still rising, in absolute terms and as a share of GDP. It is forecast to peak at 19.2% of GDP in 2018-19 and subsequently fall to 14.4% of GDP by 2022-23.

Table 2: Australian Government balance: structural and underlying

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Chart 2: Structural budget balance estimates

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Economic forecasts: slower economy and a slower outlook

This budget largely acknowledges the slow state of Australia’s economy at present and the risks to the outlook. It is less optimistic about growth in the outlook period (the next four years) than was MYEFO and last year's budget.

In this year’s Budget, real GDP growth is forecast to stay below 3% p.a. for at least the next three years. Employment growth is forecast to slow from here and the unemployment rate is forecast to stay at around its current level of 5%, largely because the participation rate may fall a touch from its recent record highs. Inflation is expected to move back up to the middle of the RBA's target band of 2 to 3% by 2020-21, which is more optimistic than the RBA's own forecasts. Wage inflation is expected to pick up pace as inflation rises, but the slower labour market suggests wage growth could undershoot Treasury's expectations yet again (table 3).

These forecasts will be updated again prior to May's forthcoming Federal election in the Pre-Election Fiscal Update (PEFO). This document will be prepared by Treasury and the Parliamentary Budget Office and released by Treasury 10 days after the election is called, as required by the Charter of Budget Honesty Act 1998. Given the very short time between this budget document and the PEFO, the forecasts in the PEFO are unlikely to differ significantly from those presented in the Budget.

As noted above, relatively weak GDP growt means that this year's improvement in the Budget operating balance has been due almost entirely to stronger nominal taxation revenue flowing from higher resources prices. These higher prices mean that tax revenue paid on mining company profits is higher than was anticipated in the MYEFO in December. Expectations about resources prices and export earnings are playing an increasingly pivotal role in the Australian Government's revenue forecasts and in its forecasts for the entire economy, as the size and influence of our mining sector grows.

The difference in economic performance between the mining and non-mining parts of Australia's economy is becoming increasingly stark as 2019 progresses. This widening gap is reflected in this year’s Budget forecasts, but its implications are downplayed. Resources-related export earnings (and resulting tax revenues) may be booming in 2019, but the non-mining sectors are now up against the combined headwinds of: global trade disruptions; slower growth in Australia’s trade partners; a downturn in residential property markets and residential construction activity; weak consumer confidence; weak background inflation; weak national productivity growth; and the devastating effects of drought, flood and other natural disasters.

Table 3: Domestic economy forecasts(a)

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As weak as they are, undershooting these forecasts of growth, employment or incomes would have serious consequences for the Budget’s operating balance and, more importantly, for Government policy considerations. The Budget’s own ‘stress testing’ of various scenarios identifies the biggest risks to national income growth and the budget's fragile balance as (1) commodity prices and the terms of trade and (2) consumer spending growth. Although household incomes will be supported by individual and small business tax cuts, it is not known how much of this extra income will be spent or saved. If too much of it is saved (e.g. people paying off their mortgages or topping up their super accounts) or spent offshore (e.g. international holidays), then local consumer spending may not benefit from the tax cuts.

A longer-term concern is the Budget's underlying estimates of recent productivity growth and the apparent assumption that it is still growing at around its long-term average. Productivity growth forecasts are not published as part of the Budget, but they are essential to the incomes and living standards that can be expected now and in the future. Slow productivity growth has been a key reason for slow wages and per capita incomes growth in Australia and other developed countries in recent years. Prior to this year’s Federal Budget (and based on MYEFO) the ISA's Chief Economist Stephen Anthony calculated that:

"Australia's medium and long-term fiscal strategy is predicated on productivity growth of 1.6 per cent from 2019-20 [but] the post 2012 trend is closer to 1 per cent. Our failure to attain this goal and the lack of structural policy reform over the past decade should be foremost in the minds of Australian decision makers. The productivity shortfall should justify urgent remedial policy and a rethink of planning processes to help ensure per capita living standards are maintained into the next decade.  … The way to raise trend growth rates is to more systematically embed economic decision making into tangible long-term productivity enhancing reform agenda." (ISA Economics, 2019-20 Federal Budget Preview, March 2019)

Chart 3: Australia's productivity history, outlook and performance 'shortfall'

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